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Role of Audit Committee and Audit Quality on the Earnings Informativeness in India
By
Dr Krishna Prasanna , Associate Professor, IIT,Madras
Geeta Ramanathan, Doctoral Scholar, IIT,Madras
Bharat Arora, MBA, IIT Madras
Abstract
Recent global financial crisis led to a slew of measures to restore the investor confidence and
aid investor protection. Greater emphasis was placed by the regulators to improve accounting
informativeness by requiring companies to establish independent audit committees. This
paper investigates the relationship between the informativeness of earnings and ownership
structure, audit committee characteristics and audit quality across 367 Indian firms over a
period of 6 years with a dataset of 2202 firm years. It is found that earnings have statistically
significant positive relationship with cumulative abnormal returns across the sample firms. In
the post governance era, audit committee independence had a positive relationship with
earnings informativeness across the family companies. Audit committee effectiveness gauged
through the number of audit committee meetings had a statistically significant positive
association with earnings and CAR relationship. Audit by Big 4 firms has been found to
improve the disclosure quality and strengthen earnings informativeness. The empirical
findings of the research study would shed light on the effectiveness of the audit committees
and provide pointers to other measures required to improve the quality of financial reporting
and information provided to the investors.
1. Introduction
Recent global financial crisis led to a slew of measures to restore the investor confidence and
aid investor protection. Corporate governance reforms have been given utmost importance by
policy makers in the backdrop of financial scandals that rocked the world. Financial reporting
assumes great importance as it is used by the stakeholders in forming expectations about the
firm‟s future earnings.
Greater emphasis was placed by the regulators to improve accounting informativeness by
requiring companies to establish independent audit committees with directors possessing
financial expertise. The constitution of the Board, establishment of an independent audit
committee comprising of directors with the right credentials, oversight role of the directors
assumed paramount importance in the revised scenario.The establishment of independent
audit committees was expected to mitigate the information asymmetry between the dominant
shareholders and minority shareholders and build trust and confidence between the firm and
external stakeholders.
Research studies from the west indicate that the quality of earnings or integrity of financial
reporting is greater when an independent director with financial expertise serves on a firm's
audit committee (Davidson et al., 2004; Krishnan, 2005).
The ownership of listed companies especially in emerging economies is concentrated in the
hands of controlling shareholders. In case of firms with concentrated ownership and
controlling shareholders, the accounting information and audit reports are not considered very
credible. Concentrated ownership is associated with low earnings informativeness as
ownership concentration prevents leakage of what they perceive as proprietary information
(Fan and Wong, 2002). Since the controlling owners are entrenched by their effective control
of the firms, their decisions that deprive the rights of minority shareholders are often
uncontestable in the weak legal systems in the region and by ineffective corporate
governance mechanisms.
While most of the research in this area is focused on US and other developed countries and
some East Asian corporations to a limited extent, to our knowledge not much has been done
in the Indian context.
This paper investigates the relationship between the informativeness of earnings and
ownership structure, audit committee characteristics and audit quality across 367 Indian firms
over a period of 6 years with a dataset of 2202 firm years. Informativeness of accountings
earnings has been measured through the relation between earnings and cumulative abnormal
stock returns (CAR). The results indicate statistically significant positive relation between
earnings and abnormal returns. Unlike the observation by Woidtke and Yeh (2013), in India
there appears to be a positive relation between family holding and earnings informativeness.
Audit committee independence had a positive impact on earnings informativeness only in
family held companies. Audit committee effectiveness measured by number of meetings had
a positive impact on earnings informativeness. Audit quality measured through audit fees had
a positive impact while consulting fees paid to auditors had a negative impact. Audit quality
measured through audit by Big 4 audit firms had statistically significant positive impact on
earnings informativeness.
These results would establish that the corporate governance regulations had a positive impact
on earnings informativeness in family held companies. Further, Audit quality helps to
strengthen earnings informativeness.
This paper contributes to both the literature on corporate governance and the disclosure
quality. It also enables the regulators and policy makers to understand and appreciate the
dynamics between corporate governance mechanisms, concentrated control and their impact
on the earnings informativeness.
The remainder of the paper is organized as follows. Section 2 discusses the regulatory
framework. Section 3 details the literature review and develops the hypothesis tested in the
paper. Section 4 describes the sample and variables. Section 5 reports the empirical results
and Section 6 presents the concluding remarks.
2. Regulatory Framework
India‟s commitment to improve the standards of Corporate Governance in the country to
align itself with international standards has taken shape with the Companies Act 2013 that
received President‟s assent in August 2013. The new act intends to create conducive
environment for corporate governance and boost the investor confidence. Some important
provisions stipulated by the Act with regard to Audit, Auditors and Audit Committee are
provided below:
It was made mandatory to rotate auditors once in every five years in case of the
appointment of an individual as an auditor and once in every 10 years in case of the
appointment of an audit firm.
Other services rendered by the auditor require approval by the board of directors or
the audit committee. Further auditors are also restricted from providing certain
specific services.
The audit committee should comprise of majority of independent directors.
Chairman of the audit committee need not be an independent director.
Majority of the members of the audit committee members are expected to be
financially literate, i.e. should have the ability to read and understand the financial
statements.
Unlisted public companies are required to appoint at least two Independent Directors.
Internal audit has been made mandatory for prescribed classes of companies
Following committees of the Board have been made mandatory for listed and
prescribed classes of companies:
– Audit committee
– Stakeholder relationship committee
– Nomination and Remuneration committee
– Corporate Social Responsibility committee
SEBI has also issued a circular dated 17th April 2014 to review the provisions of the
listing agreement with the objective to align with the provisions of the Companies Act
2013 and to make corporate governance framework more effective.
3. Literature review and hypothesis development
3.1 Ownership structure and quality of earnings
It is a well established fact that the ownership of listed firms in East Asian countries,
especially in India is concentrated in the hands of the founder and his family members. Fan
and Wong (2002) presented two potential effects of concentrated ownership in East Asia on
earnings informativeness; the entrenchment effect and information effect. Concentrated
ownership and control prevents information flow, thus creating information asymmetry and is
therefore associated with low earnings informativeness (Woidtke and Yeh,2013). However,
these studies did not include Indian companies and considered financial data from annual
reports of 1997 (Fan and Wong, 2000) and (Woidtke and Yeh, 2013).
The awareness and regulatory requirement of financial disclosures increased and improved
significantly across the countries since 2000 and to cite precisely, in the post SOX era. In
India, Clause 49 required the listed firms to provide additional disclosures since 2001. These
additional disclosures, regulations and reforms would ideally be expected to improve
earnings informativeness.
It is proposed to test and validate earlier empirical finding in the literature that
Hypothesis1
High ownership concentration is associated with low earnings informativeness
3.2 Audit committee characteristics and earnings informativeness
The primary role of an audit committee is to play an oversight role and improve & enhance
the financial reporting of a firm. Independent audit committee members with the requisite
financial expertise are expected to positively influence the financial reporting and signal good
corporate governance practices. They are expected to bring a certain transparency and
enhance the quality of the disclosures. Prior research provides evidence that having
accounting financial experts on the audit committee is associated with higher financial
reporting quality (Dhaliwal, Naiker, &Navissi, 2010; Krishnan &Visvanathan, 2008).
Fan and Wong (2002) documented a negative relationship between audit committee
independence and abnormal accruals. Chen and Zhou (2007) found that more independent
audit committees were quicker to dismiss Arthur Andersen as the auditor after Andersen‟s
credibility was threatened by the Enron scandal. Agrawal and Chadha (2005) found that the
probability of restatement of financial statements was significantly lower when the audit
committee had an independent financial expert. Dhaliwal et al., (2006) found that firms with
accounting financial experts are less likely to engage in earnings management.
There is a general belief that independent directors are better monitors of the firm than inside
directors as they are able to discharge their responsibilities objectively, without any bias and
coercion. However, another view that runs contrary to this belief is that inside directors
understand the dynamics of the firm and the industry in which the firm operates much better.
They possess firm and industry specific knowledge and are hence better equipped to steer the
company ahead.
Following the empirical observations in the other East Asian countries it is proposed that
Hypothesis 2
Independent directors on the audit committee would have a positive association with earnings
informativeness.
3.3 Audit quality and earnings informativeness
The global financial crisis, corporate frauds and scandals resulted in the audit profession
getting severely criticised. There was a widespread call on the auditors to improve their
quality of audit and thereby restore investor confidence in them.
In most of the research studies, audit quality has been conceptualized and measured from
auditor independence, audit size, auditor competence, etc. Audit quality as a concept is
unobservable and its effectiveness can only be judged by the Audit report
(Eilifsen&Willekens, 2007; Manson &Zaman, 2001).
Krishnan et al., (2009) found that audit fees were negatively related to accounting financial
expertise in the audit committee. According to them, auditors perceive that independent
financial experts on audit committee monitor the management and thereby consider it less
risky to audit such firms and charge lower audit fees. Contrary observation was made by
Abbott et al., (2003) that audit committee independence was positively associated with audit
fees. They interpreted that the audit committees demanded a higher audit quality and
therefore, audit fees were higher.
There has also been an ongoing debate on whether the audit quality of a Big 4 audit firm is
better than a non Big 4 audit firm. There is a general perception that the size of an audit firm
is an important determinant of audit quality. The larger the audit firm, the stronger it is in
withstanding pressure to issue clean audit reports. Prior research (e.g., Carey and Simnett,
2006; Reynolds and Francis, 2001) has utilized the auditor‟s propensity to issue a going
concern audit report for distressed clients as a measure of audit quality. Consistent with the
past theory (DeAngelo, 1981;Palmrose, 1988; Simunic and Stein, 1987) there is still a
perception that large audit firms are more effective at constraining the client‟s ability to
manipulate earnings.With their high audit fees, the Big 4 are more likely to be impacted by a
subsequent discovery of loopholes in their audit. Their reputational loss is likely to cause
more damage as was proved in the case of Arthur Andersen.
Similarly, providing non-audit services in addition to audit services is expected to put
pressure on the auditor, who may compromise his position and role. Provision of only audit
services is expected to give the auditor the power to conduct his audit in a non-biased and
uncompromised manner. Although audit firms are also profit making entities, the increasing
focus on consultancy services undermines the audit quality.
Provision of non-audit services compromises auditor independence. Krishnamurthy et al.
(2006) documented that the abnormal returns for Andersen‟s clients around Andersen‟s
indictment were significantly more negative, when the market perceived the auditor‟s
independence to be compromised.
Hypothesis 3
Size of the audit firm and the audit fees is positively associated with earnings
informativeness.
4. Sample and Variables
Sample consists of all non-financial listed companies included in S&P CNX 500 index of the
National Stock Exchange (NSE). The data on audit committee characteristics have been hand
collected from the corporate governance reports sourced from CMIE Prowess database.
Wherever data was missing, the annual reports have been scanned to obtain the required data.
Audit fees and other financial data have been taken from CMIE Prowess database. After
omitting the firms for which data was missing or not available, our sample size was restricted
to 367 firms over 6 years which amounts to 2202 firm years.
4.1 Earnings Informativeness
Earnings informativeness is referred to the quality of financial reporting which aids the
analysts in arriving at the rightful prediction and also helps the investors in making an
informed decision about a company. The quality of audit reports is expected to be of a certain
standard with the relevant disclosures and information. Earnings informativeness is measured
from the relation between the cumulative abnormal stock returns and earnings of the firm.
Significant positive association between firm‟s earnings and CAR indicates earnings
informativeness.
4.1.i. Cumulative Abnormal Returns
The daily expected stock return is computed from the market model. The difference between
the expected return and the actual return of each month is referred to as the abnormal return.
Compounded Abnormal return is computed for the 12 month period and cumulated. This
cumulative abnormal return (CAR) has been considered as the variable depending upon
earnings of the firm (Fan and Wong, 2000, Woidtke and Yeh,2013).
4.1.ii. Earnings
Profit after tax of the firm scaled by market capitalisation has been considered as the proxy
for earnings.
4.2.i Ownership Structure
Most of the literature on ownership considered voting rights as proxy for family ownership
and cash flow rights as proxy for outside ownership. In India, the one vote per share is the
principal law prescribed. Though the provision for differential rights with the state„s approval
exists, no Indian firm has such shareholders (Balasubramanian ,2011).
This paper uses % of ownership held by founding family members together with group
companies as proxy for family holding. Outside ownership includes total ownership of retail
investors, domestic institutions and foreign institutional investors. Total family holdings
together with outside ownership will not be equal to 100% as % of shares owned government,
NRIs and shares held in trust are excluded.
4.2. ii. Audit committee characteristics
Policy makers and regulators have focused on the constitution of independent audit
committees as one of the key requirements of improving investor confidence.The Audit
Committee needs to effectively monitor the reporting process of a firm, review audit findings
and significant adjustments, ensure compliance and thus enhance reporting quality. Financial
disclosure which is described as the quality of reported earnings is considered to be the
barometer of a country‟s corporate governance structure.
Clause 49 requires all audit committees to have at least two-third of its members as
independent directors. In order to be on par with international best practices, several far
reaching changes in regulations were brought about by SEBI in Clause 49 of the listing
agreement that outlines the functions of audit committee (Sarkar, 2013).
The percentage of Audit Committee Independence is considered as independent variable and
it is the ratio of independent directors to the total number of directors that are appointed to the
audit committee. Audit committees comprising of 100% Independent directors are
recommended as desirable governance practice. 100% independence is measured through an
indicator variable that equals one when the audit committee comprises entirely of
independent directors, and equals zero, otherwise.The total number of independent directors
in the audit committee is also considered as the additional proxy for independence. In order to
factor the audit committee quality, meetings held and the percentage attendance of
independent directors in these meetings has been included.
4.2.iii. Audit Quality
The quality of audit can be construed from different parameters, viz; Audit fees, frequency of
rotation of auditors, Peer review, Audit firm size (Big 4 or otherwise), ability to issue
qualified audit reports, etc that were used in the reviewed literature.
This study included amount of audit fees paid and other fees paid to auditors for consulting
activities to assess audit quality. Audit firm size is coded as a binary variable and is given
value of 1 if audit firm happens to be Big4, else 0. Big 4 audit firms are represented by Ernst
& Young, KPMG, Deloitte &Touche and Pricewater Coopers.
4.3. Control Variables
In addition, firm specific control variables are included following the literature. Firm size is
measured by the total assets base. Leverage is computed as ratio of total debt to total assets.
Tobin‟s q is included to control for the effects of growth on the earnings–return relation. It is
computed as the ratio of book value of assets to market value of assets.
Following Woidtke and Yeh, 2013,the entire analytical model is built on the interaction
effects with earnings.The fixed effects panel data regression model used for testing the
earnings informativeness is specified as:
( ) ( )
( )
( )
( ) ( )
5. Empirical Results
5.1 Descriptive statistics
Table 1 summarizes descriptive statistics of all the variables used for the study. The panel
data averages, standard deviation, minimum and maximum values are presented in the table.
Annual average CAR is about 8% with high standard deviation indicating high volatility. The
period of study is from 2006-2012 where equity markets faced two major crisis, global
financial crisis and sovereign debt crisis of European markets. The average earnings are
around 10% with the standard deviation of around 30%.
Family holdings on an average are 45%, whereas all outside owners were holding on an
average 35% of firms‟ capital. On an average 95% of audit committee members were found
to be independent and more than the prescribed 4 meetings were convened. On an average
83% of independent directors in the committee attended committee meetings.
Firms engage auditors not only for statutory audit but also for consultation on taxation and
other matters. Average annual audit fees paid is around 5 million for the firm whereas the
consultation fees paid is around 2 million. On an average the sample firms had leverage ratio
of 24% and tobin‟s q ratio of 1.75 times.
[Insert Table 1 here]
5.2 Ownership structure and earnings
The interaction effects of earnings, which is measured as profit after tax (PAT) divided by the
market capitalization, and the ownership structure on CAR has been examined. Table 2
reports the earnings relation with CAR along with the impact of its interaction on firm‟s
ownership structure. It is found that the relation between earnings and CAR is positive and
statistically significant at 99% confidence level. Ownership interaction was not found to be
statistically significant. However, direction of the ownership interaction is contrary to the
literature and the hypothesis 1. Family holdings have a positive impact on the relation
between earnings and CAR while outside ownership has negative impact. It can be inferred
that family firms in post regulation era report all the required information to the investors and
the expected negative relation between earnings and CAR does not persist now. The recent
literature also documents (Miller et.al., 2007) that the family firms were found to be superior
performers in the markets.
[Insert Table 2 here]
5.3 Audit committee characteristics and earnings informativeness
Audit committee independence is gauged through 3 proxies, percentage of independent
directors in the committee, 100% independence coded as binary variable and the number of
independent directors. Hypothesis 2 expects positive impact of independence. The results are
reported in Table 3. Results indicate negative relationship between 100% independence as
well as % of independence. One reason could be 80% of total sample firms had more than
80% of independent directors and hence this data lacks dispersion. A similar issue is
encountered in the analysis of 100% independence. Very few firms were coded as 0 with
most of the firms coded as 1. Number of Independent directors had the expected positive
association on earnings informativeness. One more interaction is tested whether the
independence has any interaction with family holdings since it is reported in the governance
literature that more independent directors are required to monitor controlling shareholders. It
is found that independence is positively associated with earnings informativeness in family
owned companies. Similar observation is found about independent director attendance in the
audit committee meetings. It has positive association with earnings in family held
companies. Across widely held companies, independence was found to be negative. It could
be inferred that these firms would make the required disclosures whether supported or not by
independent audit committee members. It also suggests that the mere existence of an
independent audit committee does not automatically improve the earnings informativeness.
Costs of having an audit committee might outweigh the potential benefits. These costs may
include search costs, increased director fees, costs associated with expanding the board. It is
often reported in industry circles that compliance with recent regulations about independence
is relatively more costly for smaller companies.
Overall these relationships are not found statistically significant, and hence hypothesis 2
could not be accepted. It is not totally rejected too, since independence is found to be positive
and essential among family firms.
[Insert Table 3 here]
5.4 Audit quality and earnings informativeness
The audit quality is measured through the audit fees, other fees paid for consultation and
audit firm size coded as a binary variable and their impact on earnings informativeness has
been reported in Table 4. Following the literature, higher audit fees paid is supposed to
motivate and result in superior audit quality and in turn is expected to have positive
association with earnings informativeness. As expected in hypothesis 3, audit fees have a
positive impact on the relation between earnings and CAR while other fees paid for
consultation had negative impact. The audit by Big 4 firms had a statistically significant
relationship on earnings informativeness providing a strong positive evidence to accept
hypothesis 3. Overall, audit quality is found to improve the quality of disclosures and has a
positive impact on the relationship between earnings and CAR.
[Insert Table 4 here]
Table 5 reports fixed effects panel regression estimates with robust standard errors corrected
for heteroskedasticity and includes all the variables considered for the study vis-a-vis
ownership structure, audit committee characteristics and audit quality. The earnings
relationship with CAR remains statistically significant in these models at 99% confidence
level. However, individual variables were not found statistically significant to generalise their
association with earning informativeness.
6. Concluding remarks
Post Satyam debacle, there has been renewed focus by policy makers such as SEBI on
establishing independent audit committees. There is a perception that independent audit
committees ensure reliable financial reporting and information quality provided to the capital
markets will be superior. The research paper examines this expectation empirically through
the relationship between earnings and market returns (CAR) in the post governance
regulation era (sample period 2006-2012).
It is found that earnings have statistically significant relationship with cumulative abnormal
returns across the sample firms. In the post governance era, audit committee independence
had a positive relationship with earnings informativeness across the family companies. Audit
committee effectiveness gauged through the number of audit committee meetings had a
statistically significant positive association with CAR and earnings relationship. Audit by Big
4 firms has been found to improve the disclosure quality and strengthen earnings
informativeness.
The empirical findings of the research study would shed light on the effectiveness of the audit
committees and provide pointers to other measures required to improve the quality of
financial reporting and information provided to the investors.
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Appendices
Table 1 Full sample descriptive statistics
Number of firms 367; Number of firm years 2202
Variables Mean Std. Dev. Min Max
A. Abnormal Stock Returns and Earnings
CAR% overall 0.0888 0.7568 -2.9557 6.4896
between
0.2479 -0.4672 0.9430
within
0.7151 -2.7407 5.6355
Earnings overall 0.1003 0.3038 -3.0882 9.7970
between
0.2260 -0.9388 3.4999
within
0.2119 -2.7533 6.3975
B.Ownership Structure
%familyholdings overall 45.2861 21.2668 0.0000 90.0000
between
20.6766 0.0000 90.0000
within
5.0721 2.2661 84.8527
%outsideownership overall 35.4945 14.8985 0.9400 83.6400
between
14.1195 3.0283 76.9150
within
4.8016 8.2045 76.0212
C.Audit Committee characteristics
100% Independence overall 0.8039 0.3971 0.0000 1.0000
between
0.3608 0.0000 1.0000
within
0.1669 0.0000 1.0000
Percentage Independence overall 0.9448 0.1222 0.3000 1.0000
between
0.1097 0.1950 1.0000
within
0.0542 0.3865 1.0000
No of independent directors overall 3.6531 0.9967 2.0000 6.0000
between
0.8361 2.6667 8.3333
within
0.5439 1.6800 6.9864
No. of meetings overall 4.8688 1.4717 1.0000 15.0000
between
1.2569 2.0000 14.1667
within
0.7668 0.2979 9.7021
% of attendance in meetings overall 83.6543 13.6512 20.0000 100.0000
between
9.1430 53.3167 100.0000
within
10.1558 36.2377 100.0000
D. Audit Quality
Audit Fees (millions) overall 5.5995 8.7467 0.1000 92.3000
between
8.3680 0.1000 83.3833
within
2.4869 17.3838 44.8828
Other Fees (millions) overall 2.3632 4.8711 0.0000 90.0000
between
4.4759 0.0000 66.5167
within
1.9064 28.3534 25.8466
Big 4 Audit firm overall 0.4171 0.4932 0.0000 1.0000
between
0.4806 0.0000 1.0000
within
0.1130 0.0000 1.0000
E. Control Variables
Leverage overall 0.2446 0.1924 0.0000 0.9675
between
0.1758 0.0000 0.7049
within
0.0786 -0.1433 1.0073
Tobin's q overall 1.7579 1.6149 0.0000 16.0046
between
1.2973 0.2100 8.2759
within
0.9600 -6.2574 11.2648
Total Assets (millions) overall 66736 185531.80 12.30 2952250.00
between
177371.70 787.77 2241880.00
within 54942.01 998634.60 777106.20
Table 2 Ownership and Earnings informativeness
Independent Variables CAR-Dependent Variable
Intercept 0.0577 0.0648 0.1537 0.1548
(7.81)*** (6.18)*** (1.80)* (1.81)*
Earnings 0.1924 0.5679 0.5276 0.3913
(2.61)*** (1.69)* (1.81)* (0.98)
Earnings*Outside Ownership -0.0123 -0.0121 -0.01
(-1.3) (-1.43) (-1.08 )
Earnings*Family Holdings 0.0016
(0.49)
Leverage 0.4425 0.4376
(1.90)* (1.87)*
Tobin's q -0.1048 -0.1049
(3.83)*** (3.83)***
Total Assets -3.86e -08 -4.01e -08
(-0.19 ) (-0.19)
R2 0.0003 0.0006 0.0103 0.0104
Number of firms 367 367 367 367
Number of firm Years 2202 2202 2202 2202
F-Statistic 6.83*** 1.97 5.35*** 4.38***
* 90% significance level, ** 95% significance level,*** 99% significance level
Table 3 Audit committee characteristics and Earnings Informativeness
Independent Variables
CAR-Dependent Variable
Intercept 0.1401 0.1458 0.1303 0.136 0.1338 0.1503 0.1504 0.1406
(1.65) (1.71)* (1.55) (1.60 ) (1.58 ) (1.76)* (1.76)* (1.65)*
Earnings 3.4543 3.4842 3.9715 3.7368 3.602 0.1877 0.1988 0.1917
(2.82)*** (2.86)*** (3.39)*** (3.22)*** (3.03)*** (2.22)** (2.08)** (2.35)**
Earnings*Outside
Ownership
-0.0006 0.0015 -0.0191 -0.0086 -0.0092
(-0.07 ) (0.17) (-2.22)** (-0.80) (-0.85 )
Earnings*
Family Holdings
0.0038 0.0032 0.0018 0.0008 0.0028
(1.25) (0.97) (0.6) (0.2) (0.90 )
Earnings*
%Independence
-3.4976 -3.5252 -3.444 -3.3897 -3.3778
(-2.91)*** (-2.95)*** (-2.86)*** (-2.85)** (-2.80)***
Earnings*
Audit Fee
0.0076 -0.0017 0.0021 0.0163 0.0093
(0.44 ) (-0.09 ) (0.14) (.77) (.46)
Earnings*
Other Fee
-0.0122 -0.0456 -0.0377 -0.0686
(-0.41) (-1.17) (-1.10) (-1.87)
Earnings*
Big 4 Audit firm
0.5932 0.546 0.4365 0.4635
(3.17)*** (2.13)** (2.04)** (2.10)**
Leverage 0.3477 0.3421 0.4055 0.3269 0.34 0.3598 0.3504 0.324
(1.43 ) (1.42) (1.72)* (1.35 ) (1.40) (1.48) (1.44) (1.32)
Tobin's q -0.0973 -0.0993 -0.0987 -0.096 -0.0949 -0.0994 -0.0992 -0.0964
(-3.56)*** (-3.61)*** (-3.63)*** (-3.49)*** (-3.48)*** (-3.63)*** (-3.62)*** (-3.53)***
Total Assets -1.74e -09 5.17e -09 -3.15e -08 3.13e -08 4.93e -10 6.20 e -10 2.41e -08 -6.9e -05
(-0.01 ) (0.02) (-0.15 ) (0.14 ) (0.00 ) (0.00) (.11) (.23)
Change in
Audit Fee
-0.0001
(-.01)
R2 0.0137 0.0139 0.0156 0.0157 0.0146 0.0103 0.0109 0.0125
Number of firms 367 367 367 367 367 367 367 367
Number of Firm
Years
2202 2202 2202 2202 2202 2202 2202 2202
F-Statistic 4.97*** 4.95*** 7.68*** 5.86*** 5.66*** 5.78*** 4.56*** 4.59***
* 90% significance level, ** 95% significance level,*** 99% significance level
Table 4 Audit Quality and Earnings Informativeness
Independent Variables CAR-Dependent Variable
Intercept 0.1401 0.1458 0.1303 0.136 0.1338 0.1503 0.1504 0.1406
(1.65) (1.71)* (1.55) (1.60 ) (1.58 ) (1.76)* (1.76)* (1.65)*
Earnings 3.4543 3.4842 3.9715 3.7368 3.602 0.1877 0.1988 0.1917
(2.82)*** (2.86)*** (3.39)*** (3.22)*** (3.03)*** (2.22)** (2.08)** (2.35)**
Earnings*Outside Ownership -0.0006 0.0015 -0.0191 -0.0086 -0.0092
(-0.07 ) (0.17) (-2.22)** (-0.80) (-0.85 )
Earnings*Family Holdings 0.0038 0.0032 0.0018 0.0008 0.0028
(1.25) (0.97) (0.6) (0.2) (0.90 )
Earnings*%Independence -3.4976 -3.5252 -3.444 -3.3897 -3.3778
(-
2.91)***
(-2.95)*** (-
2.86)***
(-2.85)** (-2.80)***
Earnings*Audit Fee 0.0076 0.0017 0.0021 0.0163 0.0093
(0.44 ) (0.09 ) (0.14) (.77) (.46)
Earnings*Other Fee -0.0122 -0.0456 -0.0377 -0.0686
(-0.41) (-1.17) (-1.10) (-1.87)
Earnings* Big 4 Audit firm 0.5932 0.546 0.4365 0.4635
(3.17)*** (2.13)** (2.04)** (2.10)**
Leverage 0.3477 0.3421 0.4055 0.3269 0.34 0.3598 0.3504 0.324
(1.43 ) (1.42) (1.72)* (1.35 ) (1.40) (1.48) (1.44) (1.32)
Tobin's q -0.0973 -0.0993 -0.0987 -0.096 -0.0949 -0.0994 -0.0992 -0.0964
(-3.56)*** (-3.61)*** (-3.63)*** (-3.49)*** (-3.48)*** (-3.63)*** (-3.62)*** (-3.53)***
Total Assets -1.74e -09 5.17e -09 -3.15e -08 3.13e -08 4.93e -10 6.20 e -10 2.41e -08 -6.9e -05
(-0.01 ) (0.02) (-0.15 ) (0.14 ) (0.00 ) (0.00) (.11) (.23)
Change in Audit Fee -0.0001
(-.01)
R2 0.0137 0.0139 0.0156 0.0157 0.0146 0.0103 0.0109 0.0125
Number of firms 367 367 367 367 367 367 367 367
Number of firm years 2202 2202 2202 2202 2202 2202 2202 2202
F-Statistic 4.97*** 4.95*** 7.68*** 5.86*** 5.66*** 5.78*** 4.56*** 4.59***
* 90% significance level, ** 95% significance level,*** 99% significance level
Table 5 Ownership Structure, Audit and Audit Committee Quality and Earnings Informativeness
Independent Variables Dependent Variable-CAR
Intercept 0.135 0.1294
(1.58) (1.52)
Earnings 4.6682 4.5568
(3.42)*** (3.36)***
Earnings*Outside Ownership -0.0093 -0.014
(-0.96)* (-1.24)
Earnings*Family Holdings 0.0031 0.0016
(0.86) (0.37)
Earnings*%Independence -3.0687 -3.0141
(-2.44)** (-2.40)**
Earnings*Audit Fee 0.0099 0.0088
(0.42) (0.4)
Earnings*Other Fee -0.0482 -0.0646
( -1.09) (-1.32)
Earnings*No. of Meetings 0.14522 0.0184
(0.33) '(.42)
Earnings*%AttendanceMeetings -0.0146 -0.0122
(-2.96)** (-2.19)**
Earnings * Big 4 Audit firm 0.3397
(1.19)
Leverage 0.3 0.2953
(1.20) (1.21)
Tobin's q -0.09324 -0.09154
(-3.44)*** (-3.37)***
Total Assets 6.44E-08 7.34E-08
(0.3) (.34)
R2 0.0159 0.0168
Number of firms 367 367
Number of firm years 2202 2202
F-Statistic 4.75*** 4.68***
* 90% significance level, ** 95% significance level,*** 99% significance level